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HK's fast credit rise seen risky
Source: Bloomberg News |
November 17, 2011, Thursday
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Print Edition
Print Edition
HONG Kong's "rapid" credit growth has increased the risk that banks make bad loans as the city faces a potential recession if the European crisis deepens, the International Monetary Fund said yesterday.
"Credit has been growing at an extraordinary pace, particularly for loans in foreign currency," the IMF said in a report released yesterday. Such growth may "lead to a worsening of average credit quality" and create "strains on bank funding," it said.
The United States Fed's pledge to keep borrowing costs at near zero through at least mid-2013 and credit tightening on the Chinese mainland have spurred loan demand from Chinese companies in Hong Kong, where a currency peg means the city's interest rates track those in the US. Chief Executive Donald Tsang warned last week that there's a 50 percent chance the global economy will shrink next year and Hong Kong may see "a couple of quarters of bad times" as Europe's debt crisis roiled markets.
While the development of offshore yuan business is "positive" for the city, growing deposits in the Chinese currency may intensify competition for deposits in other currencies that result in higher funding costs, the IMF said. China needs to raise the convertibility of its capital account to encourage yuan repatriation as the offshore market continues to grow, it said.
As Hong Kong-dollar loans rose with contracted deposits, the loan-to-deposit ratio in the local currency increased to 87 percent by the end of September from 78 percent a year earlier, Hong Kong Monetary Authority data released on October 31 showed. There is scope for the city's banks to further raise interest rates on demand for loans, Norman Chan, head of the HKMA said on November 4.
The IMF expects Hong Kong's economy growth will slow to 4 percent in 2012, down from 5.75 percent this year, on weaker export demand. Should the European crisis worsen and bring a "sudden downside shock" that cuts global growth by 3 percentage points, the city will fall into recession and the city government should prepare to adopt immediate fiscal stimulus such as tax cuts, the IMF said.
Hong Kong will take "appropriate measures" to stabilize its monetary and banking systems if necessary, Chan said in a statement in response to the IMF's report.
"Credit has been growing at an extraordinary pace, particularly for loans in foreign currency," the IMF said in a report released yesterday. Such growth may "lead to a worsening of average credit quality" and create "strains on bank funding," it said.
The United States Fed's pledge to keep borrowing costs at near zero through at least mid-2013 and credit tightening on the Chinese mainland have spurred loan demand from Chinese companies in Hong Kong, where a currency peg means the city's interest rates track those in the US. Chief Executive Donald Tsang warned last week that there's a 50 percent chance the global economy will shrink next year and Hong Kong may see "a couple of quarters of bad times" as Europe's debt crisis roiled markets.
While the development of offshore yuan business is "positive" for the city, growing deposits in the Chinese currency may intensify competition for deposits in other currencies that result in higher funding costs, the IMF said. China needs to raise the convertibility of its capital account to encourage yuan repatriation as the offshore market continues to grow, it said.
As Hong Kong-dollar loans rose with contracted deposits, the loan-to-deposit ratio in the local currency increased to 87 percent by the end of September from 78 percent a year earlier, Hong Kong Monetary Authority data released on October 31 showed. There is scope for the city's banks to further raise interest rates on demand for loans, Norman Chan, head of the HKMA said on November 4.
The IMF expects Hong Kong's economy growth will slow to 4 percent in 2012, down from 5.75 percent this year, on weaker export demand. Should the European crisis worsen and bring a "sudden downside shock" that cuts global growth by 3 percentage points, the city will fall into recession and the city government should prepare to adopt immediate fiscal stimulus such as tax cuts, the IMF said.
Hong Kong will take "appropriate measures" to stabilize its monetary and banking systems if necessary, Chan said in a statement in response to the IMF's report.
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